Floridian primary insurers have once again increased their use of catastrophe reinsurance for the 2016 hurricane season, as they took advantage of market forces to increase their 1-in-100 year hurricane coverage, as well as for second and subsequent events.
According to financial analysis and rating firm Demotech Inc., the Florida insurance market is very well protected, with a combination of traditional and alternative reinsurance capital, ILS and catastrophe bonds all contributing to a greater ability to stand up to hurricanes, should the 2016 season threaten the state.

Demotech reviewed its Florida Financial Stability Rating® client companies’ catastrophe reinsurance programs for the 2016 hurricane season, an annual call for data across 57 companies this year, when the firm analyses the protection taken up by the Florida insurance market.

It found that all of the client companies’ surveyed have secured first event catastrophe reinsurance protection to cover at least a 1-in-100 year return period probable maximum loss, based on conservative risk modeling parameters.

Additionally, each of the companies has in place second event catastrophe reinsurance cover protecting against at least a 50 year event return period PML, as determined after a first event that would have exceeded the 100 year PML or exhausted the mandatory layer of the Florida Hurricane Catastrophe Fund (FHCF) coverage.

Finally, depending on the severity of the first two catastrophe events, each insurance company has addressed and secured additional catastrophe reinsurance protection for a third event or multiple event scenario, Demotech explained.

Demotech said that companies are actually buying reinsurance to greater than required levels, taking advantage of the soft market conditions.

“While each company meets our required minimum for a first event, the majority of the companies purchase first event coverage well in excess of the 100-year PML, with the group aggregate limit covering to approximately 130% of the 100-year PML,” it said.

In order to facilitate the coverage for multiple event scenarios, Floridian insurance firms are leveraging various structures in their catastrophe reinsurance arrangements, such as aggregate covers, cascading features, and quota share agreements, Demotech said.

To limit impacts, most of the companies surveyed have pre-tax catastrophe loss retentions designed to limit the hit to their surplus under multiple event scenarios, restricting the impact to less than 25% of surplus.

As might be expected, the soft reinsurance market conditions have helped Florida’s private insurance market to better protect itself, and with coverage even better in 2016 the market is now even better “protected with catastrophe reinsurance than in the early 1990’s pre-hurricane Andrew, thanks to the use of both vertical and sideways protection,” as Demotech had explained when it performed the same data call last year.

Demotech commented that; “Florida client companies have taken advantage of the reduction in reinsurance pricing to fund greater limits relative to the 100 year event return period probable maximum loss for those respective periods. Second and multiple event limits have been increased relative to prior periods.”

Statutory surplus is also up, alongside the use of reinsurance, it “Increased to $3.8 B as of March 31, 2016, from $2.9 B as of December 31, 2013. This is an increase of $0.9 B or 31.0%. The $3.8 B compares to the collective surplus of $1.8 B as of December 31, 2010.”

Floridian insurers continue to take advantage of market conditions, softer pricing and the greater availability of reinsurance or ILS capital, in order to reduce their reliance on the FHCF, with more companies reducing their participation level down to 45%, from the still more common 90%.

Across the 57 Florida client companies that Demotech surveys, 47 catastrophe reinsurance programs are involved as a number have multiple affiliated entities protected by a single set of reinsurance arrangements.

Demotech reviews any insurance linked securities, or catastrophe bonds, as part of its process, receiving copies of the reinsurance agreement, the reinsurance trust agreement, and the terms of the bond. Demotech also requires that any ILS or cat bond structure have an indemnity based event trigger with no basis risk.

Also relevant for ILS markets, Demotech reviews all participating reinsurers, including their required collateralization. And the firms data shows growing participation from all the major ILS players, with some ILS funds participating multiple times through different vehicles and a number via fronted arrangements with major reinsurance firms.

When comparing the 2015 and 2016 season, Demotech found that the total insured value (TIV) in Florida had increased by 12.3%, growing from $1,727 billon to $1,989 billion. It puts this growth down to legacy carrier growth, takeouts from Florida Citizens, plus the proliferation of start-up insurers in the state.

On reinsurance limit purchased, the clear sign is that it is rising and insurers in Florida are buying more cover, both traditional and alternative.

Demotech found that in aggregate, the first event vertical limit provides 132.3% of the 100 year event return period PML in 2016, up from 127.8% for 2015. First event vertical catastrophe reinsurance limit purchased for 2016 increased $2.3 billion, or 9.0%, to reach $27.3 billion, up from $25 billion for 2015.

However, second event coverage is down slightly, with 59.2% of the 100 year event return period PML covered, compared to second event limit of 64.3% of the 100 year event return period PML covered in 2015.

Total second event catastrophe reinsurance limit purchased was up though, increasing by $0.8 billion or 5.2% to $16.1 billion, rising from $15.3 billion for 2015.

As you’d expect, the majority of the ILS fund market is involved in the Florida catastrophe reinsurance market, with an increasing number directly participating on a collateralized basis, or fronted by partners.

Other ILS funds, those few which remain cat bond only, are investing in the catastrophe bonds which provide some of the Florida insurers reinsurance protection. So overall, every ILS players is contributing capacity to this increasingly well protected Florida insurance market.

There are no real surprises in terms of which ILS managers are listed as participating, it really is the bulk of the market now directly underwriting Florida catastrophe reinsurance risk. The number involved is up on 2015 though, showing that the diversification of risk capital sources is increasingly broad in the protection Floridian insurers benefit from.